We’re currently looking for major overhauls in taxation for corporations and people in the coming years. General civil unrest, combined with decades-long examples of corporations and individuals paying no and very little taxes, is causing a groundswell of discussion in Washington regarding changes to the IRS practices, the rules for carried interest, and the tax bracketing system. Couple this with a massive infrastructure bill on the heels of the Jobs and Tax Cuts Act and the U.S. is finally feeling the pressure to pay for the spending it has racked up since 2008.
The easiest way to pay for this 13-year long spending spree will be to turn to the corporations and people who have seen their fortunes impacted the most. The “tax the rich” cries are ringing out from both parties and a need to bring taxes up to resolve debt is becoming more and more immediate.
The first pitch in this game has come from the Biden administration. With several proposed changes affecting inherited wealth, treatment of capital gains, and raising the corporate tax rate back to the 2010’s range. There will be huge shifts for the wealthiest Americans, and even for those who will dip into that range for a year or two as they sell property, their businesses, and begin shifting assets to the next generation.
Taking steps to defer your federal income bill is usually a good idea, especially if you expect to be in the same or lower tax bracket in future years. If that assumption pans out, making moves that lower your current-year income will, at a minimum, put off the tax day of reckoning and leave you with more cash until the bill comes due. If your tax rate turns out to be lower in future years, deferring income into those years will cause the deferred amount(s) to be taxed at lower rates. Great.
This confluence of historically high pent-up capital gains and what might be a purge of those positions in 2021 to avoid the tax consequences in the years to come has made for a major (albeit temporary) shift in the tenured financial advice many are used to. Some elements will still support the goals and efforts of workers, but many will be turned on their ear and are downright bad advice given these proposed changes.
Additional Resources for 'Taxmageddon'
Tax Mitigation Playbook
Opportunity Zone
Overview
How to Mitigate Capital Gains: InSight Opportunity Zone Tax Strategy
Tax-smart moves that don’t involve tax deferral
Tax-smart moves that don’t involve tax deferral There are several methods that tax planners can use that are not part of the tax deferral strategy category and that might find new and improved legs as this change happens. Contribute to your Roth IRA Qualified withdrawals from Roth IRAs are federal-income-tax-free, so Roth accounts offer the opportunity for outright tax avoidance. This strategy looks even more impressive as you can pay income tax at today’s lower tax regime, and mitigate any future taxes that will preserve the gains. Additionally, because the account avoids all capital gains tax this vehicle becomes the most promising to see capital gains on, but avoid the tax consequences of selling those assets. Making annual contributions to a Roth IRA is an attractive option for those who expect to pay higher tax rates during retirement. Convert to a Roth IRA Converting a traditional IRA into a Roth account effectively allows you to prepay the federal income tax bill on your current IRA account. This account also allows you to see the assets grow tax-free. This method is capable of avoiding ramifications from capital gains and provides the necessary insurance from the rising tax rates. This is the only method that straddles both of the coming complications. Determining the amount to convert (all or partial) should be worked into your financial plan. Contribute to Roth 401(k) The Roth 401(k) is a traditional 401(k) plan with a Roth account feature added. If your employer offers a 401(k) plan with the Roth option, you can contribute after-tax dollars. If your employer doesn’t currently offer the option, run, don’t walk, to campaign for one immediately. There is likely little cost to add such a program and this might be an oversight on the needs employees should convey to the plan sponsor. The DRA (Designated Roth Account) is a separate account from which you can eventually take federal-income-tax-free qualified withdrawals. So, making DRA contributions is another attractive alternative for those who expect to pay higher tax rates during retirement. Note that, unlike annual Roth IRA contributions, your right to make annual ‘Designated Roth Account (DRA) contributions is not phased out at higher income levels. Key point: If your employer offers the Roth 401(k) option, it’s too late to take advantage of the 2019 tax year, but 2020 is fair game. For 2020, the maximum allowable DRA contribution is $19,500. Contribute to Health Savings Account (HSA) Because withdrawals from HSAs are federal-income-tax-free when used to cover qualified medical expenses, HSAs offer the opportunity for outright tax avoidance, as opposed to tax deferral. You must have qualifying high-deductible health insurance coverage and no other general health coverage to be eligible for HSA contributions. You can claim deductions for HSA contributions even if you don’t itemize. More good news: the HSA contribution privilege is not lost just because you happen to be a high earner. Even billionaires can make deductible contributions if they have qualifying high-deductible health coverage. Additional Resources for ‘Taxmageddon’ Tax Mitigation Playbook Download Opportunity ZoneOverview
